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Smith+Nephew withdraws guidance amid COVID-19 uncertainty

Citing the rapidly changing situation related to COVID-19, Watford, U.K.-based Smith+Nephew plc said it is withdrawing its 2020 outlook. It highlighted COVID-19’s spread beyond China, as well as the slow pace of recovery for elective procedures in that country.

Biegelsen also noted that in the U.S. and Europe, the policy decisions have called for delaying elective procedures. As a result, it is difficult at this time to assess how long this situation will last.

The company appears relatively optimistic. “Looking beyond the immediate future, Smith+Nephew operates in attractive markets with excellent growth fundamentals,” CEO Roland Diggelmann said. “We are financially strong with a proven strategy and unique portfolio. Our major manufacturing and distribution facilities are all active[,] and we are ready to meet pent-up demand when the time comes.”

The company noted that first-quarter trading results will be reported May 6. It anticipates that underlying revenue growth for the first quarter will be about -8% down vs. the first quarter of last year. In addition, second-quarter revenue and first half trading margin will be down considerably vs. the prior year.

Also, the company reported March 30 changes to its annual general meeting, which is scheduled for April 9. Specifically, as a result of U.K. government instructions related to closures, shareholders will not meet in person. To that end, the meeting will be convened with the minimum quorum of two shareholders. Further, the company said all valid proxy votes will be included in the poll during the meeting.

Impact on H1

During the full-year 2019 call that took place Feb. 20, chief financial officer Graham Baker said the company expected that the COVID-19 impact will have an effect in the first half of the year. “A combination of these factors may see very little or no quarterly growth in the first quarter with … consequent pressure … on first half margins.”

At the time, Baker predicted that full-year guidance is for underlying revenue growth to be in the range of 3.5% to 4.5%.

BTIG analyst Ryan Zimmerman wrote in a March 16 note that his group had spoken over the previous week with several U.S.-based orthopedic surgeons and hospital administrators. “The orthopedic surgeons noted no change to elective surgery procedures (as of early last week) but acknowledged that the dynamic could change rapidly and in speaking with those same surgeons and others over the weekend, we began hearing about elective surgery cancellations at sites such as Massachusetts General Hospital where elective procedures are cancelled for the next two weeks (at minimum).”

Zimmerman said some administrators thought that capital demand likely would be affected in the near-term because facilities would be diverted from bigger purchases at present.

That said, at the time, when removing COVID-19, overall procedural growth was trending in-line with historic rates. He also noted that implant market share gains boded well for Stryker and Zimmer Biomet, while Johnson & Johnson and Smith+Nephew expected slight declines.

Fast-forward two weeks, and Biegelsen has predicted that Stryker, which has modest exposure to China, could be in a better spot vs. some of its peers in terms of tackling COVID-19. It also has a strong balance sheet. “We estimate that SYK’s portfolio is 60% non-elective and non-capital items make up 80% of the total revenue base,” he added. “Assuming two months of impact from China and considerable moderation in procedures during mid-March through May, we estimate that COVID-19 could have a negative 9% [year-over-year] impact in [first quarter] ’20 sales translating to reported growth of down 2% [year-over-year].”

Meanwhile, Zimmer Biomet “is highly levered to elective procedures,” Biegelsen said. He noted that it has a little more exposure to China, is less diversified than Stryker, and has more leverage on its balance sheet. All of this could result in a negative 13% year-over-year impact in first-quarter sales, translating to reported growth down 10% year-over-year.

Biegelsen then noted that it would not be surprising if other companies withdrew their outlooks. All of this could result in a number of changes in terms of travel and events, as well as hiring freezes.